Jack Keough: Distribution Job Cuts Accelerate As Oil Crisis Deepens

In the wake of Houston-based industrial distributors MRC Global, NOW Inc., and DXP Enterprises reporting large year-over-year sales and profit declines, ID contributing editor Jack Keough analyzes the impact on those companies' operations and headcount.

The deepening plunge in oil and gas sectors is causing distributors to accelerate layoffs and to revise their sales estimates downward for 2016.

“This is markedly one of the worst oil and gas cycle downturns in history,” said Andrew Lane, chairman, president and CEO of MRC Global, during a call with analysts following release of the company’s Q4 earnings.

For the quarter, MRC Global – No. 8 on Industrial Distribution’s 2015 Big 50 list – reported sales of $967 million, a 36 percent decrease compared to the same quarter last year and down 10 percent sequentially. The drop was caused by reduced customer spending across all segments and sectors: upstream, mid stream, and downstream.

“We haven't experienced the two-year sequential decline of this magnitude since the mid-1980s, and while there are many predictions on when a recovery could take place, we have yet to see any signs of one and commodity prices remain very volatile,” Lane said, according to a transcript of the call as provided by www.seekingalpha.com.

MRC Global reduced its operating expenses throughout 2015 by slashing  headcount, hiring and freezing salaries, as well as implementing other cost savings measures.

The company has eliminated more than 965 positions since the middle of 2014, representing a workforce reduction of approximately 19 percent and has reduced total operating costs by 20 percent.

In January MRC Global reduced its head count by an additional 50 positions and  says it now expects to reduce head count by another 100 positions this quarter, including 11 that were directly related to the sale of its U.S. Oil Country Tubular Goods (OCTG) business to Tulsa, OK-based Sooner Pipe, a subsidiary of Marubeni-Itochu Tubulars America.

“We will continue to evaluate the cost structure to keep it in line with customer spending and activity levels, “ Lane said.

During Q4, MRC Global closed or consolidated an additional 17 branches, generally in upstream areas where demand was described as weak.

“For the full year, we have closed or consolidated 36 branches globally. We will continue this practice of reviewing branch performance and making adjustments as needed,” he added.

And MRC Global is, of course, not alone.

Robert Workman, president, and CEO of NOW Inc., which operates primarily under the DistributionNOW and Wilson Export brands, told analysts in his company’s conference call  that the downturn in the oil business “makes others pale in comparison both in severity and longevity.”

Since the end of 2014, DNOW – No. 11 on ID's Big 50 List – reduced its non-acquisition head count by about 1,200, or 23 percent, and closed or consolidated approximately 46 branches. In addition to those expense reductions, the company added nearly 900 employees in approximately 42 locations through acquisitions in 2015. Additional head count reductions across the entire business, including within acquired companies of approximately 200 have been completed so far in 2016.

“There’s no doubt that we still have some very tough quarters ahead,” Workman said noting the decrease in rig counts.

He added that it will be a “challenging first half of 2016 and possibly beyond.

“In the U.S. energy unit, while there are several exciting organic share wins combined with gains from integrating recent acquisitions into our extensive branch and customer network,” Workman said.

He also pointed out that “it will be hard to soften the impact we'll experience from continued deep cuts in operator budgets and the resulting rig count declines.”

DNOW, which made several  acquisitions in 2015,  is still looking for companies to buy.

Workman said that his company is working on a couple larger higher value-add product line transactions that could require regulatory approval.

“Even if those deals are done, we will continue to be fiscally conservative and refine our models in processes to evaluate and plan for any potential exposure to risk, thus deals may take a little longer to close,” he said.

One of those potential acquisitions is very U.S. centric and the other is based outside of the U.S. with sales all over the world including a “a little bit of revenue” in the U.S.

Overall, NOW Inc. reported a net loss of $249 million for its fourth quarter.

Revenue in the United States for DNOW was $433 million in the quarter, down 13 percent from Q3, which was similar to the decline in the U.S. rig count. Q4 revenue in the U.S. was down 36 percent from the year ago quarter .

Fourth quarter operating profit in the U.S., excluding goodwill impairment, was a loss of $45 million compared with $42 million loss in the third quarter 2015.

Meanwhile National Oilwell Varco, (NOV) the huge oil and gas drilling equipment maker, which three years ago spun off DNOW, continues to feel the effects of the downturn.  

NOV is closing its North Houston manufacturing facility near Greenspoint at Air Center Boulevard, idling 129 workers.

In December, NOV closed its Houma, Louisiana play, laying off 80 workers. A month earlier the company closed a plant in San Angelo, Texas, eliminating 120 jobs.

In the past 18 months, NOV has cut 21 percent of its workforce, including contract labor, and closed 75 plants.

Job cuts are expected to continue through the first half of 2016, “perhaps longer, in view of the challenging market.,” said President and CEO Clay Williams in an earnings call with analysts. The company is not planning for a recovery in 2016.

To show the extent of the oil crisis, you don’t have to look far beyond the world’s largest oil field service provider, Schlumberger Ltd. which slashed a stunning 10,000 jobs in the fourth quarter. These job eliminations are on top of the 20,000 job cuts the company made in the last 18 months.

The global energy industry cut  more than $100 billion in spending and 250,000 jobs last year to keep pace with crude prices that have fallen more than 70 percent since June 2014, according to World Oil magazine.

The total number of U.S. oil and natural gas drilling rigs working in the quarter fell to 698, down more than half from 1,840 rigs at the end of 2014.

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